Digital Nomad Taxes: 8 Things You Need to Know
- Do Digital Nomads Have to Pay US Taxes?
- Do Digital Nomads Have to Pay State Taxes?
- Do Digital Nomads Have to Pay Self-Employment Taxes?
- Do Digital Nomads Have to Pay Taxes in Foreign Countries?
- What Tax Deductions Are Available for Digital Nomads?
- What Is the Physical Presence Test?
- What Is the Bona Fide Residence Test?
- What Tax Forms Do Digital Nomads Need to File—and When Are They Due?
- Get Help With Your Digital Nomad Taxes
The US tax code is one of the most complex in the world—and it can be especially confusing for Americans who often travel or live abroad. To bring some clarity to this complicated topic, let’s take a look at the basics of digital nomad taxes.
- Like all US citizens, digital nomads are required to file a US tax return even if they no longer live in the US and they may also have to pay taxes to the country where they reside.
- The IRS provides several tax benefits that digital nomads can use to avoid double taxation and reduce their US tax bill
1. Do Digital Nomads Have to Pay US Taxes?
Yes, American digital nomads are required to file a US Federal Tax Return if they make over the minimum filing requirement—no matter where they live and if they’re working remotely.
The US is one of the few countries in the world that uses a citizenship-based tax system. That means that the requirement to file US taxes depends on your citizenship status, not where you live. So even if you live in another country, as long as you’re a US citizen or a Green Card holder, you must file US taxes.
But even though you’re required to file, you may not actually owe any taxes as a digital nomad. This will depend on a variety of factors, such as your income. There are handy tax exclusions and credits that some digital nomads can use to eliminate their US tax bill entirely.
2. Do Digital Nomads Have to Pay State Taxes?
Whether digital nomads have to file or pay state taxes will depend on the state where they last resided and how recently they left. Typically, you would only need to file a State Tax return for the part of the year you lived in that state or whenever you have earned income from that state.
However, some states are notorious for trying to maintain tax jurisdiction over their former residents. These states include:
- New Mexico
- South Carolina
If you moved out of these states, they may impose state taxes on you if:
- They issued your current driver’s license or ID card
- Your spouse and/or children live there
- Your vehicle is registered there
- You’re registered to vote there
- You have a bank account open there
- You own property there
- You maintain a mailing address there (even if you’re using a friend or relative’s address)
Because of these complications, some digital nomads who originated from these states will temporarily establish residence in another, less difficult state before traveling abroad. Once you’ve left the country, it can be very hard—or even impossible—to erase your attachment to a state like California or Virginia from overseas.
If you do opt for that strategy, remember that some states don’t tax income at all, such as:
- South Dakota
Regardless, be sure to check out the specific rules in place for your state when determining whether you should file state taxes as a digital nomad.
3. Do Digital Nomads Have to Pay Self-Employment Taxes?
Many digital nomads are self-employed. As such, they will be liable for the US self-employment tax. This tax includes:
- 12.4% of your income for Social Security
- 2.9% of your income for Medicare
…coming to a grand total of 15.3% of your income. The self-employment tax also cannot be excluded through the Foreign Earned Income Exclusion (FEIE) or Foreign Tax Credit.
However, some countries have International Social Security agreements (“Totalization Agreements”) with the US. If you live in one of these countries, you may be exempt from the self-employment tax and only subject to the Social Security tax for the foreign country you live in.
4. Do Digital Nomads Have to Pay Taxes in Foreign Countries?
Digital nomads must file a US Federal Tax Return even if they live in a foreign country. But do you have to pay taxes to the government of that foreign country?
That will depend on the tax policies in place in whatever country you’re living in. While the US has a citizenship-based tax system, most countries have residence-based or territorial systems.
- Residence-based taxation means that the country taxes all income earned by residents within their borders (the definition of “resident” can fluctuate from country to country, but usually means spending at least 183 days in that country)
- Territorial-based taxation means that the country taxes only income sourced from within their borders
Residence-based taxation is the most common tax system in the world, with over 130 countries using it, including:
- Most of the EU
Territorial taxation is less common, but still used in quite a few countries, such as:
- Costa Rica
- Hong Kong
5. What Tax Benefits Are Available for Digital Nomads?
For digital nomads living abroad, there can be significant tax benefits available. The biggest three are the:
- Foreign Earned Income Tax Exclusion (FEIE)
- Foreign Housing Exclusion
- Foreign Tax Credit
Let’s go over each.
a) Foreign Earned Income Exclusion (FEIE)
The FEIE lets expats and digital nomads exclude a certain amount of foreign-earned income from US taxation. The exact number changes from year to year, but for 2022, the exclusion was $112,000 and for 2023, the exclusion increased to $120,000.
The FEIE applies only to earned income, including:
- Self-employment income
- Professional fees
…and not to unearned income, such as:
- Social Security payments
- Capital gains
The FEIE isn’t an automatic exclusion for anyone living outside of the US, either. To qualify for the FEIE, you must pass at least one of two tests:
- The physical presence test
- The bona fide residence test
Use our simple excel calculator to get an estimate of how the foreign earned income exclusion will save you money. It will make your day!
b) Foreign Housing Exclusion
The Foreign Housing Exclusion lets Americans living abroad deduct certain housing expenses from their US taxes. This exclusion can only be claimed in addition to the FEIE, meaning you must first qualify for and claim the FEIE to be eligible.
There are a few other requirements as well:
- You must have qualified housing expenses (hotel and Airbnb stays usually don’t qualify)
- You must pay your housing expenses from employer-provided income (self-employed digital nomads must use the Foreign Housing Deduction instead)
- Excludable expenses include rent, utilities (but not cable or phone), property insurance, small out-of-pocket repairs, and parking expenses near your home.
Because the housing exclusion is a bit complex, we like to explain it by saying the sweet spot is the amount over 16% of the FEIE but less than 30% of the FEIE.
Only housing expenses over 16% of the base amount can be excluded. Amounts below this base amount cannot be excluded. There is also a maximum of 30% of the year’s FEIE limit that can be excluded.
With an FEIE limit of $120,000 in 2023, housing expenses below 16% of $120,000, or $19,200, cannot be excluded. Amounts over $19,200 up to a maximum of 30% of the FEIE limit, or $36,000, can be excluded.
As an example, housing expenses of exactly $19,200 would give you no extra exclusion. Housing expenses of $19,201 would give you $1 of extra exclusion. Housing costs of $36,000 would give you $36,000 – $19,200, or $16,800 of extra exclusions.
Any housing costs over the maximum would still only give you $16,800 of extra exclusions. For example, housing expenses of $46,000 would give you a $36,000 – $19,200, or $16,800 extra exclusions. This is why we say the housing exclusion “sweet spot” is between 16% and 30% of the year’s FEIE.
For some high-cost-of-living areas, such as London or Shanghai, the maximum amount is much higher which will give you a higher exclusion.
c) Foreign Tax Credit
If you pay income taxes to the foreign country in which you reside, you can generally reduce the amount of US tax owed by the amount of foreign taxes paid using the Foreign Tax Credit. This is designed to keep expats and digital nomads from being taxed twice on the same income.
There are limits to the amount of Foreign Tax Credit you can claim. The most common one is to reduce the amount of Foreign Tax Credit when you claim the FEIE.
Not all foreign taxes will apply, either. To qualify for a Foreign Tax Credit
,, you must have a foreign tax liability that:
- Originated legally in a foreign country
- Is assessed on your income
- Is imposed on you as an individual
6. What Is the Physical Presence Test?
To qualify for the FEIE—and by extension, the Foreign Housing Exclusion—digital nomads must pass either the physical presence test or the bona fide residence test. So how exactly do those tests work?
We’ll start with the physical presence test, since it’s the easiest one for digital nomads to pass.
All that the physical presence test requires is that you spend more than 330 full days outside of the US during any 12-month period. You can spend those 330 days in a single foreign country or several—though you must be in the country legally.
7. What Is the Bona Fide Residence Test?
The bona fide residence test is more complicated than the physical presence test and much less likely for digital nomads to pass. The bona fide residence test requires that you:
- Are a US citizen (or resident alien living in a country that has a tax treaty with the US)
- Maintain a residence in a foreign country
- Live within that country for a period of time that includes an entire calendar year (January 1–December 31)
- Have no plans of returning to the US in the foreseeable future
The bona fide residence test requires that you live in one or more foreign countries for at least one entire calendar year. While an expat may meet these standards, digital nomads rarely do.
8. What Tax Forms Do Digital Nomads Need to File—and When Are They Due?
The tax forms that digital nomads must file can vary widely depending on their circumstances. In some cases, trying to keep track of what you are and aren’t required to file can feel overwhelming.
To help simplify things, here are some of the most common tax forms for digital nomads.
a) IRS Form 1040: Individual Income Tax Return
IRS Form 1040 is your personal tax return. Virtually all US citizens—including digital nomads—must file this form.
The due date to file Form 1040 is generally April 15 of each year, but may be a few days later if the 15th falls on a weekend or holiday, (though you can apply for an extension.)
If you need more time to file your digital nomad tax return, you can request an additional filing extension to October 15. In extreme cases, you can even request an extension to December 15.
b) IRS Form 2555: Foreign Earned Income
To claim the FEIE and Foreign Housing Exclusion, you must complete Form 2555 and attach it to your Form 1040.
Because this form is always submitted with Form 1040, it has the same due date: April 18th.
c) IRS Form 1116: Foreign Tax Credit (Individual, Estate, or Trust)
Form 1116 is used to claim the Foreign Tax Credit. Like Form 2555, this form must be attached to your Form 1040 and submitted at the same time.
d) FinCEN Report 114: Report of Foreign Bank and Financial Accounts (FBAR)
Any US person—including digital nomads—with more than a combined $10,000 in foreign bank accounts is required to file an FBAR.
This form is filed separately from your Form 1040, but does have the same standard due date: April 18th. (However, if you miss that deadline, there’s an automatic extension to October 16th, 2023.)
Either way, this form must be filed online and sent directly to the Financial Crimes Enforcement Network (FinCEN), not the IRS.
e) IRS Form 8938: Statement of Specified Foreign Financial Assets (FACTA)
If an expat, digital nomad, or other US person living abroad owns foreign assets worth more than a certain threshold, they must file Form 8938.
- For digital nomads filing their taxes individually, that threshold is $200,000 at the end of the tax year or $300,000 at any point during the tax year.
- For digital nomads filing a joint tax return, the threshold is $400,000 at the end of the tax year or $600,000 at any point during the tax year.
However, the thresholds are much lower for digital nomads not considered to be living abroad. In that case, the thresholds are reduced to a quarter of the amounts listed above.
(Please note that the standard for “living abroad” is the same as the qualifications for the FEIE. If you are unable to pass the physical presence test or bona fide residence test, the IRS will apply the reduced thresholds for Form 8938, even if you currently reside outside of the US.)
This form is filed with your Form 1040 and has the same due date. Foreign real estate generally does not need to be included on form 8938.
Get Help With Your Digital Nomad Taxes
Hopefully, after reading this guide, you have a better understanding of how digital nomads are taxed.
But if you still have questions, you’re far from alone. Digital nomad taxes are nothing if not complicated. There are mountains of details to juggle, with countless nuances and qualifications for each. It’s easy to get a little lost.
If you’re ready to be matched with a Greenback accountant, click the get started button below. For general questions on expat taxes or working with Greenback, contact our Customer Champions.